ABC, Inc. is currently evaluating an independent capital project, involving a fixed asset with a purchase price of $680,000. ABC will have to bear shipping and installation cost of $5,000. The asset has to be modified for use by ABC, which would cost an additional $20,000. Net Working capital has to be increased by $25,000. This is expected to be fully recovered, when the project is ended. ABC will depreciate the asset according to MACRS 3-year class (33%, 45%, 15%, 7%).
ABC plans to use the fixed asset to manufacture and sell a new product. In each of the first two years of the project, ABC expects to sell 55,000 units of the new product at a price of $12 per unit in the first year and $14 per unit in the second year. The expected sales in the 3rd, 4th and 5th year of the project are respectively, 60,000, 65,000, and 50,000 units, with the unit sale price of $13; $11; and $10 in each of those years. The cash operating charges (excluding depreciation) are expected to be 60% of the revenue in the first year, 55% in the 2nd year and 65% of revenue in each of the last 3 years of the project. The fixed asset is expected to have a pre tax salvage value of $8,000 upon project termination. ABC is in 40% tax bracket. ABC's cost of capital is 14.6%
WHAT ARE THE NET OPERATING CASH FLOWS FOR YEAR 1 THRU 5 OF THE PROJECT?
WHAT IS THE TERMINATION CASH FLOW?
WHAT IS THE NPV, IRR, and MIRR?